How to prevent instances of Fraud in Organizations? Some true stories

Under the new Companies Act 2013, in the “Internal Financial Controls”, to be instituted by the Board of Directors, one of the requirements is “Preventing Frauds and Errors”. In this context, I wish to share with you some true instances of fraud / cash embezzlement, witnessed during the 4 decades of my working life, along with what kind of actions could be taken to prevent them. If you take a pause and visualize each scenario, you will get the best out of this article.

1. Accountant cum Cashier at a Branch Office: In an organization in auto-ancillary industry, a Branch Office was catering to the marketing needs of four divisions of the company. One of the divisions maintained a bank account to meet day to day cash requirements of all the four divisions. Accountant cum Cashier was a joint signatory along with the Branch Manager with a transaction limit of Rs 10,000/= (it was in 1983). A rough cash book was maintained to record transactions, and once a fortnight Accountant cum Cashier was preparing a columnar statement, showing Division-wise expenditure and was submitting to his Divisional HO. Bank reconciliations were in arrears, On a visit, when I was reviewing the rough cash book, I noticed a withdrawal of Rs 20,000/= for which 4 cheques of Rs 5,000/= each were used. This attracted my attention as to why 4 cheques were used. When this transaction was traced into the bank statement, it turned out to be Rs 40,000/= Verification of all transaction showed that the Accountant cum Cashier has taken out Rs 2 lacs from the books, which he was lending for short terms. He brought the money back and was terminated. Prompt bank reconciliation, and regular internal audits were introduced.

2. HR Employee’s false LTA Claims: Like many companies, this organization had a process, where LTA could be accumulated for a block of 4 years. In the books LTA Provision is carried forward. The process involved employee submitting request for LTA as advance, HR verifies entitlement and advises Accounts, employee gets paid, and on return submits proof of travel, on the basis of which amount paid is expensed, and taxable LTA in the hands of the employee is recorded. HR employee handling LTA, realized that Accounts had no track or reconciliations in place. While preparing the list of LTA Advances, normally once a week, included an LTA Advance in the name of an employee, who did not seek any LTA Advance,submitted a list to Accounts, for which Accounts issued a consolidated cheque. HR employee prepared a fresh list of payees against the cheque, this time substituting his own name, in place of the other employee and sent it to the bank. He got multiple credits in his bank account. Here the second gap exploited was, that the banker was not seeking signatures of authorized signatories on the list of payees. Amount so diverted was Rs 2.50 lacs, and the HR employee absconded, LTA Provision in the books was reconciled employee-wise and cleaned up, and every month LTA provision of 1/12th of employee’s basic salary was made for all the eligible employees, and LTA paid was charged to the provision account. Bank was advised that they should insist on signatures on the list of employees.

3. Multiple Cash Payments against telephone bills, by admin employee, on the pretext of disconnections: This happened in an organization where I was an Industrial trainee. Telephone bills were received in triplicate, with amount shown as total, and also on individual support documents. While payment used to happen by cheque in the normal course, additional copies were used by the admin employee to claim cash as emergency payments. Accounts did not keep track of receipts from the telephone department. The issue came to light when an alert Manager questioned telephone expenses charged to his department in Budget / Actual / Variance Report.

4. Funds diversion by an F&A employee in an overseas office: While a back office in India was required to verify scanned support documents and process payments, emergency payments were allowed with the understanding that overseas F&A employee would subsequently submit support documents. This employee created fake payables, and uploaded payments. He was able to take credit to his own account, since the Manager of the Overseas Office in good faith left his own access card for bank payments with the concerned F&A employee. Back Office did not seriously follow up for support documents for emergency payments, and the expenditure was charged off. The issue came to light when the Controller was browsing through bank payments, noticed multiple credits to the same bank account which happened to be an employee’s salary account. This was a case of compromise on controls in implementation, which were actually designed well.

5. Fake Muster Register maintained by a HR employee: This happened when I was in the role of an articled clerk. In a manufacturing unit, casual labor register had thumb impressions of payees, and against the same name which appeared week after week, thumb impression was different each time!

6. Suppressing Cash Receipts at a Housing Society: When I was reviewing cash receipts against maintenance bills in a housing society, I noticed missing serial numbers. Concerned Secretary quickly admitted that it took the money home. Since no one reviewed his books, he was able to manage this. In institutions where cash collections are necessary, now, I recommend pre-printed receipt books, with carbon copy, identification for each receipt book in use through a number, such that book number receipt number combination provides a distinct serial number for each receipt, issue of receipt books under acknowledgement and seeking account for number of receipts used each month, and finally recommending a display board at the point of Cash Receipts that persons remitting cash should insist on “official” receipt. Using a Computerized print facility with suitable controls is a better option.

7. Admin Manager collecting cash and permitting vendors to put up stalls: It was an organization with large number of employees and sprawling offices. Admin Manager was repeatedly approached by vendors for permission to put up stalls. He permitted on a charge of Rs 500/= per day per vendor, and issued “official” receipts, indicating number of days for which a vendor was permitted, collected cash and spent it on miscellaneous admin expenses, with no indication to the Finance Department. Each vendor showed the receipt at Security, who recorded entry in a register and permitted the vendor. Internal audit came to know of this in their audit visit, traced number of entries at the Security into the register maintained by the Admin Manager for cash receipts, and noticed that he suppressed receipts. Admin Manager lost his job.

8. Falsified Travel Claims by employees on overseas travel: Since the organization travel rules permitted higher reimbursements, on submission of proof of expenditure, in stay and taxi fares, employees submitted fabricated claims. As long as it was within the limit under the travel rules, F&A permitted such claims. Altering amounts in cab receipts was one such practice, which could be verified by google search for distance travelled in each claim, and verifying tariff published in the US, for each State. Receipts for Stay could be related to Cards issued to the employees with forex loaded for use on travel. Mere enquiry by F&A, reduced such instances.

9. Admin Employee collecting cheques on behalf of vendors: This practice should be discouraged. In one instance, a communication sent to Vendor was returned as addressee not known, and on deputing an F&A employee, it was noticed that such a vendor did not exist.

10. F&A Employees creating a bank account in a Vendor’s name and realizing payments made to vendor: This was more serious. Two F&A employees created a partnership deed, represented to a banker that they were in business, opened a bank account in the Vendor’s name, started collecting cheques for advance and realized them. At the yearend balance confirmation, vendor refuted having received these cheques. Concerned employees quickly surrendered. Subsequently, in the vendor master, each vendor’s bank account number was included and cheques were issued, with bank account reference also being a part of payee’s name.

Possible remedial measures in general:

i. Up to date accounting

ii. Timely Reconciliations, with Bank Reconciliation topping the list

iii. Ledger reviews through a Custodian concept where all the ledgers are reviewed by respective groups, after a month closure. For example Payroll team becomes Custodian for all Payroll related accounts

iv. Random Physical Verifications

v. Segregation of Duties, to see that no employee is able single handedly deal with a transaction

vi. In Branch offices with only one or two employees, institute close reviews and periodical Internal Audits

vii. Internal Audit plan to cover “vulnerable areas in operations”

viii. Monitoring processes involving “manual interventions”

ix. Planned “Job Rotation” and

x. Minimizing cash handling, which is now possible through reimbursement accounts available from banks.

Thank you for your attention

Tulasi S Sastri

FCA, CISA